Saturday, May 03, 2014

MISUNDERSTANDING SELF-INTEREST YET AGAIN

“Modern history might have turned out very differently had politicians and their economic advisers picked the right reading material.

That was the suggestion from Andy Haldane, the executive director for financial stability at the Bank of England. “Economists read the wrong book by Adam Smith,” he said.

The Wealth of Nations, published in 1776, maintains that the best we can do for society is to have everyone pursue their own self-interest. With the added benefits of competition, the theory is that this results in prosperity for everyone.

Economists took the message to heart and built models founded on individual people seeking to do the best for themselves and individual firms trying to maximise profits on the assumption that if everyone did that, the collective outcome would be the best that could be achieved for society, said Mr Haldane, who was speaking at Sheffield University on Thursday night.

“Actually, what events have shown of the last five years is that leaving people to pursue their own individual self-interests in highly competitive markets might not lead always to the best outcomes for society,” he added.

“That is not a new lesson because 17 years prior to writing The Wealth of Nations, Adam Smith had produced a second book, called The Theory of Moral Sentiments, much less well known and largely unread by the economics profession but quite widely read outside of it.

“What that book put centre stage are a rather different set of lessons: the importance of cooperation in addition to competition. The importance of reciprocity, of fairness, of values plural as distinct from value singular. The 20th century was the century of The Wealth of Nations. In the light of the financial crisis, the 21st might be one in which Smith’s first book begins to take centre stage.”

COMMENTS

Andy Haldane may well have got the wrong end of the stick regarding Adam Smith, though much of his remarks fit the bare facts. Smith’s Theory of Moral Sentiments was published in 1759 and his Wealth Of Nations was published in 1776. Both books were regulalry published in the 19th century but most attention was given to his second book rather than to his first, which was based on his lectures on Moral Philosophy as the professor of the same subject. But both books are comfortably compatible, despite a few German intellectual critics in the late 19th century and some new readers of Smith’s works today (or popular articles of the alledged differences) in the 20th and early 21st century.

Most economists today have not read either of Adam Smith’s books; few have read either, and fewer have read both. Mostly they merely repeat alleged ideas of Smith’s picked up from throw-away lines about him from their undergraduate tutors, or, from what they read/see in the media, and, worse, almost universally attribute to him ideas he never held and probably dismissed. That is what motivated me to begin this Blog and call it ‘Adam Smith’s Lost Legacy’ (after a book of mine with that title, published by Palgrave-Macmillan in 2005).

Andy Haldane, the executive director for financial stability at the Bank of England makes two assertions: 1 that WN “maintains that the best we can do for society is to have everyone pursue their own self-interest. With the added benefits of competition, the theory is that this results in prosperity for everyone”; and 2: “What that book [TMS] put centre stage are a rather different set of lessons: the importance of cooperation in addition to competition. The importance of reciprocity, of fairness, of values plural as distinct from value singular”.

Smith was a philospher neither a politician nor a preacher. He did not describe what people ought to do; he analysed what people actually did, their many foibles and all, and the social consequences of the manner in which their conduct affected 18th century society and had plausibly affected earlier societies throughout history, of which he took the long view (described as ‘congectural history’ by his first biographer Dugal Stewart, 1793, eulogy to the Royal Society of Edinburgh).

He did not maintain “that the best we can do for society is to have everyone pursue their own self-interest”. Smith was not an evangelist! He observed that people in the main do pusue their self interests (not ‘aim’ to do so!), for which there were consequences for them and for society.

He discussed what those consequences consisted of in both TMS and WN. For sure, pursiing self-interests had been a universal human trait for millennia before Smith wrote about it and he observed among the consequences were the clear consequences that many self-interested actions were deterimental to the self-interests of those affected by them. Consider how it could be otherwise? Note also that in WN Smith gives over 60 examples of the malign affect of self-interested actions on others and on society generally! (Again, has Andy Haldane read either TMS or WN close enough to be sure his remarks are accurate about Smith?)

Indeed, the history of the previous millennia to beyond classical Greece and Rome is replete with self-interested rulers certainly doing the ‘best’ for themselves by pursuing their self-interests in disregard of the malign consequences on those they ruled and had absolute power over!

The line that “the added benefits of competition, the theory … results in prosperity for everyone” is likewise deficient. Much of early commerce was grossly uncompetitive, as Smith showed, but simply pursuing one’s self-interest, as commonly understood, then and now, is no guarantee that “prosperity” would result for everyone. Society, as Smith understood it, was more complex than that and always had been.

Economic theory, post Smith, developed quite independently of Smith, as seen in the grafting onto Smith of theories of “laissez-faire” and hostility to government regulations. Instead of Andy Haldane’s summary that Smith believed that “the collective outcome would be the best that could be achieved for society” is counter-factual.

Turning to TMS, Andy offers a “rather different set of lessons: the importance of cooperation in addition to competition. The importance of reciprocity, of fairness, of values plural as distinct from value singular.”

This one-sided assertion of its absence in both of Smith’s books is so counter to Smith’s philosophy that I hesitate to dissect Andy Haldane’s assertion. I simply point out that human co-operation is a centrepiece common to both TMS and WN. Smith tirelessly pointed out that human co-operation was a distictive characteristic of human society: Man in civilised society “ stands in need at all times of the cooperation and assistance of great multitudes. while his whole life is scarce sufficient to gain the friendship of a few persons” (WN I.ii.2: p. 26).

Smith demonstrates the extent of this co-operation with many other people, many unknown to each other, in the manufacture of ‘the day” labourer’s “woolen coat” (WN I.i.11: p 22). In the smaller groups that made up early human societies co-operation was an essential characteristic of all of them, out of which evolved over the millennia that “interested” each in the “fortunes of others” and “rendered their happinness necessary to him”, summed as human sympathy for others (TMS 1st paragraph and etc.). He regarded society has composed of many “so weak and imperfect a creatures as man” (TMS p71) and in society we observe and learn about acceptable behaviour, particularly in the absence of taught moral guidance - what Smith called the “great school of self command” in the presence of others where without it we can “see ourselves as other see us” (Burns: To a Louse”; or in Smith’s prose, TMS p.158. See my “Adam Smith: a moral philosopher and his political economy”, 2008/2nd ed. 2010. Chapter 4. pp.25-38, Palgrave-Macmillan).

Andy Haldane writes “The 20th century was the century of The Wealth of Nations”. No it wasn’t. By then and throughout, Smith’s WN had been repeatedly presented often quite contrary to its contents (safe because so few actually read it but many represented it quite different to its contents - and that of TMS too!).

Modern societys is a vast complex of human co-operation, so vast and complex that no government or central bank could ever have invented and designed it, moreover no group of humans could collectively try to manage it and if they tried they would make it worse.

Smith's central point was that human self-interest when - and BECAUSE - each self-interested person is reliant on co-operation with others therefore they must mediate their self-interest with those they deal with, so that each self-interested person is persuaded by conversation or by exchanging some of what they have for some of what the other has - in short by voluntary bargaining and persuasion. This is stated in both TMS and WN.